Houston, we see the runway…
Years ago, I had the occasion to fly into Denver airport, and as the plane started to bank into the descent, the cabin was buffeted by high winds. For those not familiar, and I count myself as one at the time, the slopes of the Rocky Mountains create columns of rising air that make it very bumpy for air traffic, both take off and landings. Ultimately and without issues, despite my rising blood pressure, the pilot confidently wrestled the plane and us on to the tarmac for which was a rather uneventful and soft landing.
Most recently, the FED has raised rates for what may be the last of a string of rate hikes that number 11 within roughly a year. This response was in reaction to the “Great Pandemic Inflation” caused by COVID-19 and the real threat of global chaos.
Looking at the factors that drove this spike in inflation, one can’t argue the supply side factors caused by direct changes in COVID disrupted supply chains across the world and then supply shocks caused by the Russian invasion of Ukraine. One can even argue when, why and who caused the demand side of fiscal and monetary policy responses that directly drove consumer spending. But what we can’t argue now, is that “all in all” the worst-case scenario for America was averted. Furthermore, the data shows that both the above issues have been addressed if not brought back to normal.
In fact, despite the brightest minds calling for unruly if not uncontrollable inflation being here to stay. The FED has created an interest rate environment where real rates are positive, something that we thought might be impossible since the onset of the Great Financial Crisis. Can you imagine that for almost two decades we’ve had zero and even negative real rates? Amazingly, the deceleration of inflation has been as fast as the rise. So fast, that we can’t and shouldn’t waste too much time worrying about how we got here because we aren’t “here” anymore.
Of course, the FED isn’t fully bought in that inflation is dead and they shouldn’t be but even before the pandemic there have been disinflationary trends that aren’t easily displaced, like technology and oil consumption. However, so much “success” against inflation and the lack of typical recessionary pressures have gotten people to talk about a soft landing.
But before we go there, there is one last source of inflation and that would be wage inflation. One big difference for this cycle of FED tightening is the immunity that employment is having during this massive rate hike. Unemployment remains stubbornly low, which is a major reason for the robust consumer spending but the decline in wage growth has been a great relief to the FED. In fact, Gross Labor Income has decelerated which is the cause of the equal slowdown in consumer spending growth. Can we get a hooyah!
Finally, as we get to the point, it is looking more likely, at least in the short run, that the FED has engineered a soft landing. And why not, haven’t we flown into Denver many times before? As we end with the chart below (and full disclosure, the FED has a very poor track record of forecasting so ignore the dotted lines) it may be a pretty good landing. Now let’s just get back to the gate!